Mr Old Man Payment Q&A Prepayment, Fraud Risk and Article 12 — Where Does the Risk Lie? By Mr Old Man Posted on 5 minutes ago 4 min read 0 0 2 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr Discussions around the possible revision of UCP 600 often bring out interesting practical concerns. One of them, raised recently by a colleague, goes straight to the heart of risk allocation in documentary credits: If a nominated bank prepays or discounts under a credit, and fraud is discovered later, who ultimately bears the risk? A fair question — and not an easy one. Question Dear Mr. Old Man, According to me, Article 12 may need to be rewritten. If a bank is allowed to prepay or discount an LC, under whose risk does it act in case fraud is discovered after prepayment but before maturity? In my view, whether the credit is available by acceptance or by negotiation may make a difference. Best regards, H. Answer Dear H., Thank you for raising a very practical and important point. I understand your concern. However, introducing such an allowance into Article 12 may not be straightforward, as it could create tension within the existing structure of UCP 600. Where a nominated bank honours or negotiates a complying presentation in good faith — and without knowledge of fraud at the time — it is generally understood that the bank is acting within the framework of UCP. In such circumstances, the issuing bank’s obligation to reimburse should stand, and the risk ultimately rests with the applicant. That said, fraud is not governed by UCP. It is a matter of applicable law. If a dispute arises and is brought before a court, it is the court that will determine liability. In doing so, the court may take UCP into account, but is not bound by it. This perhaps explains why UCP deliberately avoids going too far into fraud-related scenarios, leaving such matters to legal systems rather than attempting to regulate them within the rules. From a practical perspective, this also reinforces the importance of careful KYC and risk assessment — especially when dealing with unfamiliar or higher-risk markets. Best regards, Mr. Old Man __________ A closing thought Issues like this remind us of a simple truth: UCP provides the framework. But risk, especially fraud risk, does not always stay within that framework. And when it doesn’t, the answer is rarely found in the rules alone.